China has scrapped a restriction on cross-border capital movement imposed in January, in what is believed to be the first concrete move to loosen capital controls since authorities began imposing curbs designed to shield the renminbi from downward pressure last year.
The People’s Bank of China has told financial institutions that they are no longer required to maintain a balance of inflows and outflows when processing cross-border renminbi payments, according to people familiar with the matter. The latest instructions reverse January’s oral guidance instructing banks to maintain either a net balance or net inflows of renminbi.
The loosening measure — the first known step towards deregulating outbound money flows since outflow pressure began in late 2014 — suggests the authorities are increasingly confident they have weathered the country’s worst-ever bout of capital outflow. The US dollar has weakened against a range of global currencies in recent months, lessening pressure on the renminbi.
Reducing outflows may also help to reinvigorate the central bank’s effort to promote renminbi internationalisation. Encouraging the accumulation of renminbi in offshore centres such as Hong Kong, London, Singapore and Frankfurt is crucial to enabling foreigners to use the currency for trade and investment. Liquidity drain has sharply reduced Hong Kong’s offshore renminbi market over the past year.
Monthly average renminbi payments exiting China in the three months to the end of February, compared with an average $28bn per month in 2016
Before the January crackdown, cross-border renminbi had become an important channel for taking money out of China. Once offshore, renminbi can be converted to hard currency in Hong Kong or other offshore centres without regulation by mainland authorities.
An average $28bn per month exited China through renminbi payments in the first 11 months of 2016, but the monthly average fell to $6bn in the three months to the end of February, according data from the State Administration of Foreign Exchange.
Joerg Wuttke, president of the European Union Chamber of Commerce in China, said the policy change had been in place since Thursday, adding that restrictions on converting renminbi into dollars remained.
He also said the PBoC delivered the latest instructions orally and that he expected written regulation in June that would specify due-diligence requirements for banks to process renminbi payments.
A foreign banker in Beijing said the PBoC had lifted restrictions throughout the country. The central bank had imposed different quotas in various cities, with Beijing and Shanghai facing the toughest restrictions. PBoC did not respond to a request for comment on Wednesday afternoon.
The renminbi fell 7.5 per cent in 2016, its worst year ever, but the currency has risen 0.9 per cent so far this year. China’s foreign-exchange reserves hit a four-year low in January as the central bank sold dollars to prop up the renminbi, however it rose slightly in both February and March, reversing a seven-month run of declines.
Despite the loosening, other recent curbs on capital outflow — notably a crackdown on foreign acquisitions by foreign companies — remain. Outbound foreign direct investment slumped 49 per cent in the first quarter of 2017 compared with the same period a year earlier, according to commerce ministry data.